Christmas came early for the second time in a row for many taxpayers and tax professionals. The IRS has announced that it would (again) delay the new $600 Form 1099-K reporting threshold for third-party settlement organizations.
Here’s what you need to know.
Transition Year
The IRS has announced that it will treat 2024 as an additional transition year. If that sounds familiar, the same thing happened last year when the agency announced that the 2023 tax year would be considered a transition period—the same thing happened the year before that. As a result, third-party settlement organizations were not required to report tax year 2023 transactions on Form 1099-K to the IRS or the payee for the lower $600 threshold amount—the existing $20,000/200 transaction threshold remained in effect through year-end.
Under the most recent guidance, third-party settlement organization reporting will only be required if the taxpayer receives over $5,000 regardless of the number of transactions in 2024. The dollar value will scale to $2,500 for transactions in 2025 before hitting the $600 threshold in 2026 and after.
That should mean that you will not receive Form 1099-K unless you hit the existing transaction threshold—an exception exists for taxpayers subject to backup withholding. All other taxpayers should see no change in early 2025 when forms go out, consistent with the treatment from last year. It’s worth noting, however, that it’s not unlikely that some Form 1099-K reporting threshold companies could still send the form for totals over $600—there’s no need to panic if you receive a form, as that doesn’t change the tax treatment.
Not A Surprise
The move shouldn’t come as a surprise for most taxpayers. Last year, the IRS announced it was planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan.
It remains unclear whether the IRS has the authority to change the reporting threshold—that should be in Congress’ hands. However, in its remarks on the threshold change last year, the IRS cited a statute that gives broad authority to the Commissioner to administer the tax laws.
Background
For years, taxpayers who provided certain goods or services worth more than $600 were responsible for issuing Form 1099-MISC. That changed in 2012 with the introduction of the new Form 1099-K.
Form 1099-K introduced a requirement for reportable payment transactions defined as payment card or third-party network transactions. Payment card transactions include accepting a card—such as a gift card, credit card, or debit card—for goods or services. A third-party network transaction is one that is settled through a third-party payment network, such as PayPal. For the most part, think payment app or online marketplaces.
For the last few years, Form 1099-K required reporting when payments totaled more than $20,000 and more than 200 transactions were settled through a third-party network. No threshold applies to payment card transactions—payment cards include credit, debit, or stored value cards such as gift cards. As noted in the IRS FAQs, if you received $0.01 of payments from a payment card transaction, you should receive a Form 1099-K for those payments.
As I’ve written previously, the gap between the “old” Form 1099-MISC reporting threshold of $600 and the Form 1099-K reporting threshold of $20,000 was a cause for concern. The fix from Congress was a lower $600 threshold amount for Form 1099-K set to take effect in the 2022 tax year, meaning forms that would be distributed in early 2023. Instead, as noted, 2022 was treated as a transition year. 2023 and 2024 will also serve as transition years.
Taxpayers and tax professionals will likely be relieved to hear the news. There have long been concerns that the $600 threshold was far too low and resulted in millions of unnecessary Forms 1099-K, including those that reported personal transactions.
Notably, the $600 threshold has never been adjusted for inflation. However, if cost of living adjustments had been made each year since 1954—the year that section 6041 of the tax code was introduced—the $600 threshold would now be over $7,040.
Penalty Relief
The IRS also announced that it will not assert penalties under section 6651 or 6656 for a third-party settlement organization’s failure to withhold and pay backup withholding tax during the calendar year. However, those that have performed backup withholding for a payee during 2024 must file a Form 945 and a Form 1099-K with the IRS and furnish a copy to the payee.
For calendar year 2025 and after, however, the IRS will assert penalties under section 6651 or 6656 for a third-party settlement organization’s failure to withhold and pay backup withholding tax.
Rationale
According to the IRS, tax gap studies have consistently demonstrated that third-party income reporting significantly raises voluntary compliance with tax laws. For example, computerized document matching in the early 1980s—where the IRS matched data reported by third-party financial institutions to data reported by taxpayers—significantly reduced the underreporting of dividend and interest income. And the requirement that taxpayers supply Social Security numbers for dependent children resulted in a drop in the numbers of dependents claimed on returns.
Applicability
Some taxpayers are confused about their own reporting requirements—simply receiving a form (or not) doesn’t control the tax treatment.
Reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.
However, the casual sale of goods and services, including selling used personal items like clothing, furniture, and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.
That includes those Taylor Swift tickets that you sold for a gain. That is taxable, even if you’re not in the business of selling Eras Tour tickets—and you may well receive a Form 1099-K. That’s because the gain on the sale of a personal item is taxable (sadly, the loss on the sale of a personal item is not deductible).
Of course, transactions in the course of business will be reportable on Form 1099-K if they reach the threshold.
Each payment app or online marketplace will have its own processes for categorizing payments—for example, some have different accounts for business and personal transactions. The IRS encourages you to review the policies of any apps or online marketplaces you use to make sure that your transactions are reported appropriately.
Also, be smart. Content creators—like some on TikTok—have suggested that you can simply move your online business over to a personal account to avoid receiving Form 1099-K. That, they reason, means you won’t have to report that income on your tax return. That’s terrible advice for many reasons. Not only is it tax evasion, but most apps require compliance with their terms and services. If you’re lying about using the app, it may get you booted off and, perhaps, permanently banned.
Reporting Obligations
Pushing back the threshold slowly is good news for taxpayers and tax professionals. However, remember that the changes in the law apply to third-party reporting, not your individual tax obligations—those haven’t changed.
It has always been the case that you must report your taxable income, whether it is payable to you in cash, on a credit card, through a business checking account, or through a cryptocurrency platform.
More Info
You can find more information in Notice 2024-85.
The IRS also has a dedicated webpage on its website, Understanding Your Form 1099-K, to provide resources for taxpayers, including what to do with a Form 1099-K and what to do if you get a Form 1099-K in error.
And, don’t forget to check back with our Forbes tax team for updates as they happen.
Read the full article here